SBA loans are government-backed loans made by banks and lenders, not by the government itself
An SBA loan is a loan from a bank or credit union where the Small Business Administration guarantees part of the debt. This means if you cannot repay the loan, the SBA will pay the lender back a portion of what you owe — usually 75 to 90 percent, depending on the loan type. Because the lender's risk is lower, they can offer better terms: longer repayment periods, lower interest rates, and smaller down payments than a conventional business loan.
The SBA does not lend the money itself. A bank or other lender makes the loan, and the SBA backs it. You explore to the lender, not to the SBA, though the lender will submit your process to the SBA for approval of the may provide. The entire process typically takes four to six weeks from process to funding.
SBA loans are available to small businesses that meet the SBA's size standards, which vary by industry. A business might be considered small if it has fewer than 500 employees, though some industries have different thresholds. You must also show that you cannot get conventional financing on reasonable terms without the SBA may provide.
Key Takeaways
- The SBA guarantees part of the loan amount, which allows lenders to offer lower rates and longer terms than conventional business loans.
- You borrow from a bank or credit union, not from the SBA, and the lender decides whether to move forward with your process.
- The most common SBA loan is the 7(a) loan, which can be used for working capital, equipment, real estate, or debt refinancing.
- You will need a business plan, personal financial statements, tax returns, and proof of how you plan to use the money.
- Interest rates are set by the lender and are typically 2 to 3 percent higher than the prime rate, though the SBA caps how much lenders can charge.
The three main types of SBA loans and what they cover
The 7(a) loan is the most common SBA loan. It can be used for almost any business purpose: buying equipment, purchasing inventory, paying for renovations, refinancing existing debt, or covering working capital. The maximum loan amount is $5 million, and you can borrow up to 90 percent of the purchase price of real estate or equipment. Repayment terms range from 5 to 10 years for equipment and working capital, and up to 25 years for real estate.
The 504 loan is designed specifically for buying fixed assets like buildings, land, or machinery. It works differently from a 7(a) loan: you get a first mortgage from a bank and a second mortgage from a certified development company (CDC), which is a nonprofit organization that works with the SBA. The SBA guarantees the CDC's portion. This structure lets you put down as little as 10 percent of the purchase price. Repayment terms are typically 10 years for equipment and 20 years for real estate.
The microloan program is for businesses that need smaller amounts — up to $50,000. These loans are made through nonprofit intermediaries rather than banks, and they often come with business training and mentoring. Repayment terms are typically 3 to 6 years. Microloans are often easier to get than 7(a) loans if you have limited credit history or collateral.
What you need to bring when you explore
Lenders will ask for your personal credit report and score, so you should know yours before you explore. Most lenders want a credit score of at least 680, though some will work with lower scores if other parts of your process are strong. You will also need to provide personal financial statements showing your assets and debts.
Bring your business tax returns for the past two years, or if your business is new, your personal tax returns for the past two years. You will need a current business balance sheet and profit-and-loss statement, even if you are just starting out — you can create a projected one. The lender will also want to see your business plan, which should explain what your business does, who your customers are, and how you plan to use the loan money.
Have your lease or deed ready if you are borrowing for real estate or equipment. If you are buying something specific, bring quotes or invoices showing the cost. If you are using the money for working capital or other general purposes, be prepared to explain exactly how you will use it and how it will help your business grow or stay afloat.
How interest rates and fees work
The lender sets the interest rate, but the SBA caps how much they can charge. For a 7(a) loan, the rate is typically the prime rate plus 2 to 3 percent. The prime rate changes with the Federal Reserve, so your rate will depend on when you explore. The SBA does not set a single rate — it sets a maximum, and lenders compete within that ceiling.
You will also pay an SBA may provide fee, which is a one-time charge of 2 to 3 percent of the may provide portion of the loan. This fee is usually added to your loan amount, so you pay it back over time rather than upfront. Some lenders also charge an origination fee of 1 to 2 percent, though this varies.
The total cost of an SBA loan is usually lower than a conventional business loan because the rates are capped and the terms are longer. However, you will pay more in interest than you would on a personal loan or a loan secured by your home, because the lender is taking on more risk.
Collateral and personal guarantees
For a 7(a) loan, the lender will ask you to pledge business assets as collateral — equipment, inventory, accounts receivable, or real estate. If your business does not have enough assets, the lender may ask for personal collateral, such as your home or car. The SBA requires that you pledge all available business assets, even if the loan amount is smaller than the value of those assets.
You will also sign a personal may provide, which means you are personally responsible for repaying the loan if your business cannot. This is true even if your business is a corporation or LLC. If you default, the lender can go after your personal assets to recover the debt.
For a 504 loan, collateral requirements are similar, though the structure is different because there are two lenders involved. The CDC will typically require a first lien on the property being purchased, and the bank will have a second lien.
Who cannot get an SBA loan
The SBA will not back loans for certain types of businesses. These include gambling operations, lending businesses, real estate investment or speculation, and businesses that primarily sell alcohol. Nonprofits, government agencies, and businesses that have been in operation for less than two years may face additional restrictions or requirements.
You also cannot get an SBA loan if you have been convicted of a felony within the past 20 years, if you are delinquent on any federal debt, or if you have defaulted on a previous SBA loan. If you owe back taxes or child support, you will not be approved until those debts are resolved.
If your business is in an industry the SBA considers high-risk — such as speculative real estate or certain financial services — you may be denied even if you meet all other requirements. The lender makes the final decision, but they must follow SBA guidelines.
How SBA loans differ from conventional business loans
A conventional business loan from a bank has no government may provide. The lender takes on all the risk, so they charge higher interest rates, require larger down payments, and offer shorter repayment terms. They also typically require more collateral and a higher credit score. If you cannot get a conventional loan, an SBA loan may be your option.
SBA loans also have more paperwork and a longer approval process because the SBA must review and approve the may provide. A conventional loan might close in two weeks; an SBA loan typically takes four to six weeks. However, the lower rates and longer terms often make the extra time worth it.
Some lenders offer SBA loans as their primary product and are very efficient at processing them. Others treat them as a secondary option. When you shop for lenders, ask how many SBA loans they close per month — a lender who does many of them will move faster and may have better rates.
Frequently Asked Questions
Can I get an SBA loan if I have bad credit?
Most lenders want a credit score of at least 680, but some will work with scores as low as 600 if your business has strong revenue or you have significant collateral. A cosigner with better credit can also help. Talk to multiple lenders — requirements vary widely.
How long does it take to get the money after I am approved?
Once the SBA approves the may provide, the lender typically funds the loan within one to two weeks. The entire process from process to funding usually takes four to six weeks, though it can be faster if your process is straightforward and the lender is experienced with SBA loans.
What happens if my business fails and I cannot repay the loan?
The lender will pursue collection, which may include seizing collateral, garnishing your wages, or placing a lien on your home. Because you signed a personal may provide, your personal assets are at risk. The SBA may provide protects the lender, not you.
Can I use an SBA loan to pay off credit card debt?
Yes, you can use a 7(a) loan to refinance existing business debt, including credit cards. However, the lender will want to see that the refinancing improves your cash flow or reduces your interest burden. Using the loan purely to consolidate personal debt will not be approved.
Do I have to use a specific lender, or can I shop around?
You can explore to any bank or credit union that offers SBA loans. Shopping around is a good idea because rates, fees, and approval timelines vary. Ask each lender about their SBA experience, their current rates, and how long their process takes.